Here’s a deal that will send a chill down the balance sheets of certain Australian and Canadian media companies which did deals with private equity groups in 2007.
Goldman Sachs and four other banks have sold $A1.8 billion worth of high yield bonds issued to help finance the buyout of Big Brother producer, Endermol at a 30% discount to face value.
The sale, which wasn’t supported by the London-based Barclays, which has just raised $A8.9 billion in new capital, means the banks have taken losses of more than half a billion dollars to get rid of the unwanted securities. It’s a move that calls into question deals that saw KKR finance the partial buyout of the Seven Network, CVC buy 75% of PBL Media and Goldman Sachs help finance a TV distribution and production business with Canwest Global, the parent of the Ten Network.
CVC paid the best part of $A5.3 billion (including debt) for its 75% of PBL Media (it includes $250 million for NBN), KKR around $A3.2 billion for its near 50% stake in the Seven Media Group and Goldman Sachs financed the $A2.5 billion purchase by Ten’s parent of a large TV production businesses based in the US and Canada (which owns the CSI franchise).
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All three Australian networks will deny the sale has any impact on their businesses or prospects, but it does underline how far values for buyouts have fallen and how unwanted high yield bonds are, especially those issued in media deals.
A 30% discount would cut the value of CVC’s stake in PBL Media by more than $1.7 billion and the value of the KKR deal with Seven by around $1.1 billion.
The Goldman Sachs led sale gives us an understanding of how the smartest investment bank in the world (one that doesn’t really need to sell assets at a loss) sees the current and future value of leveraged debt, and high-priced media deals.
It thinks valuations paid last year are 30% too high, which has implications for the owners of PBL Media and Seven in particular.
The sale also questions the attractiveness of the debt that the buyout companies will have to raise when it comes from flipping the stakes in Seven and Nine back into the market in the next couple of years. KKR and CVC will find it tough to refinance existing borrowings unless there’s a lift in interest cost and a smaller profit on the refloating or resale of the PBL and Seven stakes.
Goldman Sachs led banks that lent 2.2 billion euros (more than $A3.4 billion) last year to finance the 2.6 billion-euro (about $A3.9 billion) buyout of Endemol by Dutch billionaire John De Mol, Italian Prime Minister Silvio Berlusconi’s Mediaset and Goldman’s private-equity unit. The other banks included Credit Suisse, Royal Bank of Scotland, Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
Goldman coordinated the sale of Endemol’s loans and market reports say it lifted the discount after investors rejected a price of 72.5 cents. So desperate were the banks to sell the debt that they agreed to provide financing for some investors who bought at a higher price of 75 cents in the dollar.
John de Mol and a partner started Endemol and Big Brother and used its success in Europe to sell the company to Spanish telecoms group, Telefonica back in 2000 for 5.5 billion euros, or well over $A11 billion at the time.
Even though it was successful Telefonica paid too much and couldn’t make it pay and had it on the market from 2005 before selling out to De Mol and his partners in early 2007, just as the subprime problem was emerging in the US but before the credit crunch bit.
Perhaps the deal at most risk involving Australia is the Goldman Sachs financed purchase of the Alliance Atlantis TV production business with Canwest in Canada. That blew out Canwest’s debt to around $A3.9 billion (which includes debt raised to buy a string of newspapers).
Goldman financed the $A2.5 billion purchase of Alliance Atlantis, with a minor contribution from cash strapped Canwest. The Ten Network’s share price has dropped sharply, but Canwest’s 56% is worth more than the market value of Canwest’s listed securities in Canada.